With the economic downturn well underway, it looks as though IT — as a significant cost center that impacts the cost of virtually every business activity in the organization — will once again be a prime target of cost-cutting efforts. In fact, a recent Accenture survey of U.S. and U.K. IT executives revealed that 72 percent are being asked to reduce costs.

However, the key difference this time, according to Accenture executive Michael Nieves, is that, while CIOs have certainly been asked to reduce IT costs before, and have done the “easy stuff,” now they’re also being asked to use IT to cut business costs.

“CIOs need to get away from looking at small cost reductions and figure out ways that will result in steep cuts of as much as 30 to 40 percent,” Nieves said. “Also, the key lesson they have learned from earlier IT reductions is that the indiscriminate swing of the hatchet can create unintended consequences and adversely affect the entire organization. This time they need to make it sustainable and improve the performance of IT as a cost differentiator.”

One area that has been targeted in the past is discretionary spending. This, said Nieves, can have unintended consequences by negatively affecting IT service quality and business growth (which, as a result of reduced demand, can prompt yet more funding cuts).

Instead, Nieves recommends a three-prong approach that he likens to the three facets of a diamond. They can be done simultaneously, he said, but the challenge is to coordinate, sequence and combine them effectively. They are:

Minimize. This involves identifying clear and immediate cost reduction opportunities that will provide cash flow and can also produce longer term results. The CIO should be able to tap into relatively rapid savings by finding and tackling those hidden costs that have seeped into the business over time and have often become operating costs with little if any value.

As an example, take the case of one retail organization that found while looking to minimize operating costs that its business units had developed their own IT budgets. As a result, about $60 million was annually spent on IT initiatives that the CIO was unaware of — including salaries for nearly 100 IT professionals on the business units’ payroll. The CIO reclaimed the $60 million, rationalized the IT services to support these units and then provided services to the business that resulted in a $30 million savings.

Optimize. By improving the use of software and hardware assets, thereby divesting non-essential assets and decreasing the average per unit cost of IT assets, current operations can run more efficiently. This begins by making permanent changes in IT spending — and capabilities — through such means as consolidation, rationalization, virtualization, cloud computing, etc.

Accenture’s internal IT optimization effort is an example. Leveraging the Internet’s scale and cost efficiencies, the organization rapidly moved to a single technology platform that involved migrating nearly 80,000 e-mail users in 48 countries. This involved the transfer of up to 1,000 e-mail users per day. The company installed an e-mail capability that allowed employees to manage their e-mail via mobile devices.

Redesign. Structural changes are embedded by shifting the focus to an efficient and effective IT operating model that will secure long-term sustainability. This drives improvements in labor costs, extracting savings through a better operating model, industrialized processes, transformational technologies and sourcing strategies.

“There are many different levers within each of these three facets,” Nieves said. “The challenge to the CIO is ‘Which one do I pull? How do I squeeze on one side of the waterbed and not have it leak on the other?’”

The caveat, he said, is that this cannot be a case of CIOs simply cherry picking from a list of tactical options. Similarly, organizations cannot rely on industry benchmarks, but rather on context, and follow steps that are tangible, actionable and immediate.

“Cuts need to provide relief in the near term, the midterm and the long term, which entails months or quarters rather than years,” Nieves said. “CIOs should see the big picture and demonstrate cuts that are sustainable and will improve business performance over time. The call for action is now.”